Stifel Nicolaus Internet analyst Scott Devitt on Expedia’s (ticker: EXPE) Q4 2005 earnings:
• We rate shares of Expedia Buy. We value Expedia at $24 per share or 15x our estimate of 2007 enterprise value – to – unlevered free cash flow (tax-effected). We have lowered our target price from $26 to $24 per share to reflect the disappointing outlook given by the company. We continue to believe in the long-term opportunity for Expedia but note that near-term share appreciation is not likely given a lack of catalysts. Given the shares traded in after hours at $20.25, our revised target price offers 19% potential upside for an investor with patience.
• Gross travel bookings for the quarter were $3.4 billion, up 17% over the comparable year-ago period, and 14% domestically.
• We forecast that Expedia will generate $618 million in EBITA in 2006 and $707 million in EBITA in 2007. For 2006, we estimate revenue of $2.4 billion and $1.13 in EPS. We forecast $17.97 billion in gross bookings for full year 2006, or growth of 15.5% year/year.
• We believe Expedia is making significant headway in securing a relevant international footprint. A tremendous amount of growth is likely to come from international operations over the next 3-5 years, most notably in the U.K, Germany and Asia. That stated, Europe is shaping up to be a difficult market in 2006 driven by competition from suppliers and well-entrenched legacy agencies.
Expedia reported a quarter that missed expectations modestly, coming in about 3% light across relevant metrics such as gross booking, revenue, and operating income. More importantly, the company presented an outlook that will not be viewed positively by investors. Expedia noted investment in the business would drive negative operating income growth in the first half of 2006. We are estimating a 2006 with gross bookings growth of 12% and 0% operating income growth for the full year. This company lacks a catalyst over the next six months, yet we continue to believe the shares are inexpensive when the opportunity is viewed with a long-term horizon. We would be opportunistic buyers of Expedia shares with a 12-month target price of $24 down from $26, all else being equal.
Management believes that given the recent announcements of newly signed 5 year GDS contracts, the fundamental airline/agency model will remain intact, though likely at reduced compensation levels. As a result management believes that Expedia will experience reduced revenue per air ticket in 2006. In addition, management guided to high single-digit to negative EBITDA growth in the first half of 2006 expects positive EBITDA growth in the second half of the year. Further, it is anticipated that Expedia will fully utilize its net operating losses in 2006.
We forecast that Expedia will generate $618 million in EBITA in 2006 and $707 million in EBITA in 2007. We estimate revenue of $2.4 billion and $1.13 in EPS in 2006 and $2.665 billion in revenue and $1.29 in EPS for 2007. We forecast $17.97 billion in gross bookings for full year 2006, or growth of 15.5% year/year. We value Expedia at $24 per share or 15x our estimate of 2007 enterprise value – to – unlevered free cash flow (tax-effected).